Stress Testing Mortgages. Part 1
“One needs to be careful and not over-reliant on any one model,” said Scott L. Smith, Associate Director for Capital Policy at the Federal Housing Finance Agency (FHFA). He was referring to the financial models used by major financial institutions to estimate potential losses. On February 4, 2015, he was presenting a GARP-sponsored webinar on countercyclical stress tests to set capital requirements. Smith explained how credit risk is measured for mortgages, and described a way to embed stress testing that uses countercyclical concepts. He and colleague Jesse Weiher, Senior Economist at FHFA, performed dynamic stress testing that was adjusted to […]
Cyber Risks: 5 Core Capabilities
Integration of cybersecurity into an organization’s risk management framework is “still in the hunter-gatherer state,” said Yo Delmar, VP, Governance Risk & Compliance (GRC) at MetricStream. She was the second of two presenters at the December 16, 2014, webinar on cybersecurity organized by the Global Association of Risk Professionals. Cyber risks are currently incorporated into existing risk management and governance processes in an ad hoc fashion that is “unorganized and fragmented,” Delmar said. “There is quite a bit of work to do to get to a rationalized state” that would permit management of such risks. “Most companies have the vision […]
Cyber Risks: “the New Normal”
“We are living in the middle of a cyber war,” said Christophe LeSieur, Global Practice Lead of Governance, Risk & Compliance (GRC) at CSC. He was the first of two presenters at a webinar on cybersecurity sponsored by the Global Association of Risk Professionals held on December 16, 2014. He described “the new normal” as “an environment of unprecedented tension” whose mega-trends are: social media, information technology (IT) and internet everywhere, proliferating platforms (mobile, bring your own device[BYOD]), and a huge quantity of data. The world is becoming ever more different, and the number of attacks is growing. Just this […]
When Data Is Sparse. Part 2
It’s difficult to model sovereign credit risk for emerging markets using structural models such as the Merton model because “calibration is always an issue,” said Rob Stamicar, Senior Director of Research in Multi-Asset Class Risk Management at Axioma, continuing a theme during the second half of his webinar on December 2, 2014. During the first half, he showed how the probability of default can be used as a common link among the asset classes of interest (bonds, swaps, and equities). In the second half, he focused more on sovereign credit risk. Calculation of sovereign risk could be done directly, “but […]
When Data Is Sparse. Part 1
When modelling risk in emerging markets, are you hampered by sparse data? “Relationships between different asset classes can help measure the sovereign risk in emerging markets,” said Rob Stamicar, Senior Director of Research in Multi-Asset Class Risk Management at Axioma. He was sole presenter at a webinar on December 2, 2014, sponsored by the Global Association of Risk Professionals. When modelling global multi-asset class portfolios, “aggregation can be challenging,” said Stamicar, because the FX rates must also be taken into consideration—the subject for another day. His talk focussed on three asset classes: equity, fixed income, and credit portfolios. Infrequent data, […]
Public vs Private Banks in India and China
“Public sector banks perform worse than private banks In India whereas there is no significant performance difference for the two sectors in China,” said Dr. Rajan Singenellore, Global Head of the Default Risk and Valuation Group at Bloomberg. He gave an overview of operational performance and credit risk trends in Banking in Emerging Markets, and was the third of three webinar panellists on November 20, 2014, organized by the Global Association of Risk Professionals. For both countries, Singenellore compared government-owned banks with private sector banks. The terminology is different: India has public sector undertakings (PSU) banks whereas China has state-owned […]
“Expect More Niche Customer Targeting”
In India and China, “large state-owned banks often have a significant constraint on their ability to manage liabilities,” said Professor Moorad Choudhry from the Department of Mathematical Sciences at Brunel University and author of Principles of Banking. He was the second of three panellists at the webinar Banking in Emerging Markets held on November 20, 2014, organized by the Global Association of Risk Professionals, and his role was to describe “operational realities.” The 2018 advent of new Basel III rules for capital and liquidity requires 100 percent compliance with new rules on the liquidity coverage ratio (LCR) and the net […]
“Lending Will Be Marketing Gimmick”
What will be the effect of Basel III on banks in emerging markets? “Commercial banks will become less interested in providing loans,” said Dr. Michael C. S. Wong, the first panellist in a webinar on Banking in Emerging Markets held November 20, 2014, and sponsored by the Global Association of Risk Professionals. He is Associate Professor of Finance at City University of Hong Kong, and Chairman at CTRISKS Rating. Wong summarized the challenges of the new Basel III regulatory regime, with its tougher capitalization and liquidity requirements. A global systemically important bank (G-SIB) will have additional capital and cash-holding requirements, he said, […]
Stressed Interest Rates: Battle of the Models
For generating shocked interest rate curves, such as a sudden economic stress might engender, “a three-factor parameterization solves many problems—but issues remain,” said Alexander Bogin, Senior Economist at the Federal Housing Finance Agency, and the second presenter at a webinar on modelling interest rate shocks held October 28, 2014, and sponsored by the Global Association of Risk Professionals. To develop an improved yield curve approximation, Bogin showed three variants of non-linear Laguerre functions of time to maturity. These were the Nelson-Siegel model (which has 3 factors); the Svensson model (4 factors); and the Björk-Christensen model (5 factors). Over a two-year […]
Stressed Interest Rates: ‘Simple’ Not Good Enough
“It’s difficult to apply historical down-shocks to the current low interest rate environment,” said Will Doerner, “and models have problems in the low interest rate environments of today.” Doerner is Senior Economist at the Federal Housing Finance Agency (“Agency”), and was the first presenter at a GARP webinar on how to generate historically-based interest rate shocks, which was held October 28, 2014. An accurate estimation of market risk helps financial institutions determine the amount of capital needed to withstand adverse market events. Interest rate changes represent a key factor for institutions with large fixed income portfolios. As such, when stress […]